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Redbox Acquires NCR DVD Kiosk Business

6 Feb, 2012 By: Erik Gruenwedel

Coinstar and NCR Corp. Feb. 6 said they entered into agreement whereby Coinstar-owned Redbox will assume control of NCR’s entertainment division, including 10,000 kiosks operating under the Blockbuster Express brand.

Redbox will pay up to $100 million for the assets, which include a five-year manufacturing and services agreement with Duluth, Ga.-based NCR valued at $25 million in profit (and $75 million in revenue) over the term of the deal.

NCR gets $25 million regardless whether Redbox acts upon the manufacturing and services agreement, according to the company.

“The whole idea of this arrangement was to create a significant customer relationship with Redbox,” said CEO Bill Nuti in a call with analysts. “We can provide services for their kiosks and other businesses like their coin businesses — as well as a manufacturing agreement where we think we are better a better manufacturer of what we sell in the marketplace than perhaps who they are doing business with today.”

Scott Di Valerio, CFO of Coinstar and interim president of Redbox, said the deal is a win-win for both companies.

"As the global self-service solutions leader, NCR has strong technology, manufacturing and servicing capabilities, and we look forward to leveraging their expertise as Coinstar continues to grow its core automated retail businesses and expands its offerings."

The deal does not include the Blockbuster Express license, which NCR owns and operates under a disputed license agreement with Blockbuster LLC. Justin Hotard, president of NCR Entertainment, in an email to consumers, said it was business as usual until the third quarter when the acquision is finalized.

Hotard and other staffers in the entertainment unit will remain with NCR through the transition and then be offered positions elsewhere in the company, a spokesperson said.

With NCR exiting the disc rental business, the Express franchise would appear to be in jeopardy going forward.

“Once the deal is completed, NCR will have no need for the Blockbuster license,” NCR spokesperson Jeff Dudash confirmed. “NCR will be out of the owner-operator business in entertainment.”

Marc Lumpkin, spokesperson with Dish/Blockbuster, said the Express license agreement was terminated with NCR last summer — a position denied by NCR at the time. The two sides now are in litigation concerning the matter.

As to whether Dish would roll out kiosks under the Blockbuster name going forward, Lumpkin declined to comment.

NCR has wanted to sell the Blockbuster Express unit, which operated as a distant second to No. 1 Redbox in terms of market penetration and consumer awareness, for some time.

Indeed, Blockbuster Express reported a fourth-quarter (ended Dec. 31) operating loss of $15 million due in part to kiosk depreciation and DVD/Blu-ray Disc amortization. Revenue increased 44% to $46 million compared to revenue of $32 million during the previous-year period. Express lost $60 million in operating profit on revenue of $163 million (up 60% year-over-year) for the fiscal year.

Revenue growth was driven by increased Express rentals and the sale of disc rental kiosks to an unnamed customer in the South Asia Pacific region.

"Through this agreement with Redbox, NCR will be better positioned to focus on expanding our business in our targeted industries," said John Bruno, EVP and chief technology officer for NCR. "Additionally, this transaction affords us the opportunity to develop a long-term strategic relationship with Coinstar and partner on delivering new and innovative solutions to the market."

Gil Luria, managing director, equity research with Wedbush Securities in Los Angeles, said the transaction underscores the fundamental differences between the two companies.

“I think the big difference is that Redbox is a company with expertise in entertainment retailing and NCR is a technology company,” Luria said. “They didn’t pick the same quality locations and didn’t know how to manage the merchandising as well as Redbox.”

Eric Wold, analyst with B. Riley & Co. in Los Angeles, said the transaction eliminated the No. 2 kiosk competitor and affords Redbox the ability to gain entry into Safeway and Publix stores while adding incremental revenue.

"Until we are able to get a better handle on the overall impact to revenues and [pre-tax earnings], we will be cautiously optimistic on this transaction," Wold wrote in a Feb. 7 note.

The transaction is subject to regulatory approval and is expected to close in the third quarter. 

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